intermediate accounting, 9e (spiceland) chapter 1
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Copyright ©2018 McGraw-Hill
Intermediate Accounting, 9e (Spiceland)
Chapter 1 Environment and Theoretical Structure of Financial Accounting
1) The primary function of financial accounting is to provide relevant financial information to
parties external to business enterprises.
Answer: TRUE Difficulty: 1 Easy
Topic: Environment of financial accounting and reporting
Learning Objective: 01-01 Describe the function and primary focus of financial accounting.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; Keyboard Navigation
2) Accrual accounting attempts to measure revenues and expenses that occurred during
accounting periods so they equal net operating cash flow.
Answer: FALSE Difficulty: 1 Easy
Topic: Cash versus accrual accounting
Learning Objective: 01-02 Explain the difference between cash and accrual accounting.
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: FN Measurement; Keyboard Navigation
3) The FASB is currently the public-sector organization responsible for setting accounting
standards in the United States.
Answer: FALSE Difficulty: 1 Easy
Topic: Development of accounting and reporting standards
Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of
accounting standards, including convergence between U.S. and international standards.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Legal; Keyboard Navigation
4) The FASB's due process invites various interested parties to indicate their opinions about
whether financial accounting standards should be changed.
Answer: TRUE Difficulty: 1 Easy
Topic: GAAP―Standard-setting process
Learning Objective: 01-04 Explain why establishing accounting standards is characterized as a political process.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Legal; Keyboard Navigation
2
Copyright ©2018 McGraw-Hill
5) Accounting for stock-based compensation is an area in which the FASB has received little
political interference.
Answer: FALSE Difficulty: 1 Easy
Topic: GAAP―Standard-setting process
Learning Objective: 01-04 Explain why establishing accounting standards is characterized as a political process.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Legal; Keyboard Navigation
6) The Public Reform and Investor Protection Act of 2002 (Sarbanes-Oxley) changed the entity
responsible for setting auditing standards in the United States.
Answer: TRUE Difficulty: 1 Easy
Topic: Encouraging high-quality financial reporting
Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Legal; Keyboard Navigation
7) A rules-based approach to standard-setting stresses professional judgment as opposed to
following a list of rules.
Answer: FALSE Difficulty: 1 Easy
Topic: Encouraging high-quality financial reporting
Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; Keyboard Navigation
8) Under federal securities laws, the SEC has the authority to set accounting standards in the
United States.
Answer: TRUE Difficulty: 1 Easy
Topic: Development of accounting and reporting standards
Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of
accounting standards, including convergence between U.S. and international standards.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Legal; Keyboard Navigation
9) The primary responsibility for properly applying GAAP when communicating with investors
and creditors through financial statements lies with a firm's auditors.
Answer: FALSE Difficulty: 1 Easy
Topic: Encouraging high-quality financial reporting
Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; Keyboard Navigation
3
Copyright ©2018 McGraw-Hill
10) Auditors play an important role in the resource allocation process by adding credibility to
financial statements.
Answer: TRUE Difficulty: 1 Easy
Topic: Encouraging high-quality financial reporting
Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting.
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; Keyboard Navigation
11) The purpose of the conceptual framework is to provide a structure and framework for a
consistent set of GAAP.
Answer: TRUE Difficulty: 1 Easy
Topic: Conceptual framework―Purpose
Learning Objective: 01-06 Explain the purpose of the conceptual framework.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; Keyboard Navigation
12) In the United States, the conceptual framework indicates GAAP when a more specific
accounting standard does not apply.
Answer: FALSE Difficulty: 1 Easy
Topic: Conceptual framework―Purpose
Learning Objective: 01-06 Explain the purpose of the conceptual framework.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; Keyboard Navigation
13) Materiality can be affected by the dollar amount of an item, the nature of the item, or both.
Answer: TRUE Difficulty: 1 Easy
Topic: Concepts―Qualitative characteristics
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
14) According to the FASB's Statements of Financial Accounting Concepts, conservatism is a
desired qualitative characteristic of accounting information.
Answer: FALSE Difficulty: 1 Easy
Topic: Concepts―Qualitative characteristics
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
4
Copyright ©2018 McGraw-Hill
15) Equity is a residual amount representing the owner's interest in the assets of the business.
Answer: TRUE Difficulty: 1 Easy
Topic: Concepts―Elements of financial statements
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
16) Revenues are inflows or other enhancements of assets or settlements of liabilities from
activities that constitute the entity's ongoing operations.
Answer: TRUE Difficulty: 1 Easy
Topic: Concepts―Elements of financial statements
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
17) Gains or losses result, respectively, from the disposition of business assets for greater than,
or less than, their book values.
Answer: TRUE Difficulty: 1 Easy
Topic: Concepts―Elements of financial statements
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
18) Comprehensive income is another term for net income.
Answer: FALSE Difficulty: 1 Easy
Topic: Concepts―Elements of financial statements
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
19) The FASB's conceptual framework lists relevance and timeliness as the two fundamental
qualitative characteristics of decision-useful information.
Answer: FALSE Difficulty: 1 Easy
Topic: Concepts―Qualitative characteristics
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
5
Copyright ©2018 McGraw-Hill
20) The monetary unit assumption requires that items in financial statements be measured in a
particular monetary unit.
Answer: TRUE Difficulty: 1 Easy
Topic: GAAP―Underlying assumptions
Learning Objective: 01-08 Describe the four basic assumptions underlying GAAP.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
21) The periodicity assumption requires that present value calculations take into account the
number of compounding periods in each year.
Answer: FALSE Difficulty: 1 Easy
Topic: GAAP―Underlying assumptions
Learning Objective: 01-08 Describe the four basic assumptions underlying GAAP.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
22) Determining fair value by calculating the present value of future cash flows is a level 1 type
of input.
Answer: FALSE Difficulty: 1 Easy
Topic: Concepts―Recognition - Measurement - Disclosure
Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
23) The FASB's framework for measuring fair value doesn't change the situations in which fair
value is used under current GAAP.
Answer: TRUE Difficulty: 1 Easy
Topic: Concepts―Recognition - Measurement - Disclosure
Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
24) The revenue/expense approach emphasizes determining the appropriate amounts of revenue
and expense in each reporting period.
Answer: TRUE Difficulty: 1 Easy
Topic: Evolving GAAP
Learning Objective: 01-10 Contrast a revenue/expense approach and an asset/liability approach to accounting standard setting.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
6
Copyright ©2018 McGraw-Hill
25) The asset/liability approach emphasizes matching to determine what assets and liabilities
should be reflected on the balance sheet.
Answer: FALSE Difficulty: 1 Easy
Topic: Evolving GAAP
Learning Objective: 01-10 Contrast a revenue/expense approach and an asset/liability approach to accounting standard setting.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
26) In IFRS, the conceptual framework indicates appropriate accounting when a more specific
accounting standard does not apply.
Answer: TRUE Difficulty: 1 Easy
Topic: International Financial Reporting Standards
Learning Objective: 01-11 Discuss the primary differences between U.S. GAAP and IFRS with respect to the development of
accounting standards and the conceptual framework underlying accounting standards.
Bloom's: Remember
AACSB: Diversity
Accessible/AICPA: BB Global; Keyboard Navigation
27) Political pressure never affects the IFRS standard-setting process.
Answer: FALSE Difficulty: 1 Easy
Topic: International Financial Reporting Standards
Learning Objective: 01-11 Discuss the primary differences between U.S. GAAP and IFRS with respect to the development of
accounting standards and the conceptual framework underlying accounting standards.
Bloom's: Remember
AACSB: Diversity
Accessible/AICPA: BB Global; BB Legal; Keyboard Navigation
28) External decision makers would not look primarily to financial accounting information to
assist them in making decisions on:
A) Granting credit.
B) Capital budgeting.
C) Selecting stocks.
D) Mergers and acquisitions.
Answer: B Difficulty: 1 Easy
Topic: Environment of financial accounting and reporting
Learning Objective: 01-01 Describe the function and primary focus of financial accounting.
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Resource management; Keyboard Navigation
7
Copyright ©2018 McGraw-Hill
29) Corporations issue their shares to the investing public in the:
Primary market Secondary market
a. Yes Yes
b. No Yes
c. Yes No
d. No No
A) Option a.
B) Option b.
C) Option c.
D) Option d.
Answer: C Difficulty: 1 Easy
Topic: Environment of financial accounting and reporting
Learning Objective: 01-01 Describe the function and primary focus of financial accounting.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Resource management; Keyboard Navigation
30) The primary focus for financial accounting information is to provide information useful for:
Investing decisions Credit decisions
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A) Option a.
B) Option b.
C) Option c.
D) Option d.
Answer: A Difficulty: 1 Easy
Topic: Environment of financial accounting and reporting
Learning Objective: 01-01 Describe the function and primary focus of financial accounting.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Resource management; FN Risk analysis; Keyboard Navigation
8
Copyright ©2018 McGraw-Hill
31) Which of the following groups is not among the external users for whom financial
statements are prepared?
A) Customers.
B) Suppliers.
C) Employees.
D) Customers, suppliers, and employees are all external users of financial statements.
Answer: D Difficulty: 1 Easy
Topic: Environment of financial accounting and reporting
Learning Objective: 01-01 Describe the function and primary focus of financial accounting.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Risk analysis; Keyboard Navigation
32) Which of the following is not true about net operating cash flow?
A) It is the difference between cash receipts and cash disbursements from providing goods and
services.
B) It is a measure used in accrual accounting and is recognized as the best predictor of future
operating cash flows.
C) Over short periods, it may not be indicative of long-run cash-generating ability.
D) It is easy to understand and all information required to measure it is factual.
Answer: B Difficulty: 2 Medium
Topic: Cash versus accrual accounting
Learning Objective: 01-02 Explain the difference between cash and accrual accounting.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
33) Which of the following groups is not among financial intermediaries?
A) Mutual fund managers.
B) Financial analysts.
C) CPAs.
D) Credit rating organizations.
Answer: C Difficulty: 2 Medium
Topic: Environment of financial accounting and reporting
Learning Objective: 01-01 Describe the function and primary focus of financial accounting.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
9
Copyright ©2018 McGraw-Hill
34) Which of the following was the first private-sector entity that set accounting standards in the
United States?
A) Accounting Principles Board.
B) Committee on Accounting Procedure.
C) Financial Accounting Standards Board.
D) AICPA.
Answer: B Difficulty: 2 Medium
Topic: Development of accounting and reporting standards
Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of
accounting standards, including convergence between U.S. and international standards.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Legal; Keyboard Navigation
35) Which of the following does not apply to secondary markets?
A) Transactions are important to the efficient allocation of resources in our economy.
B) New resources are provided when shares of stock are sold by the corporation to the initial
owners.
C) Transactions help to establish market prices for additional shares that may be issued in the
future.
D) Many investors might be unwilling to provide resources to corporations if there is no
available mechanism for the future sale of their stocks and bonds to others.
Answer: B Difficulty: 2 Medium
Topic: Environment of financial accounting and reporting
Learning Objective: 01-01 Describe the function and primary focus of financial accounting.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Resource management; FN Risk analysis; Keyboard Navigation
36) Porite Company recognizes revenue in the period in which it records an asset for the related
account receivable, rather than in the period in which the account receivable is collected in cash.
Porite's practice is an example of:
A) Cash basis accounting.
B) Accrual accounting.
C) The matching principle.
D) Economic entity.
Answer: B Difficulty: 1 Easy
Topic: Cash versus accrual accounting
Learning Objective: 01-02 Explain the difference between cash and accrual accounting.
Bloom's: Evaluate
AACSB: Analytical Thinking
Accessible/AICPA: FN Measurement; Keyboard Navigation
10
Copyright ©2018 McGraw-Hill
37) Which of the following is not a potential benefit of accrual accounting, compared to cash-
basis accounting?
A) Timeliness.
B) Better reflecting economic activity.
C) Periodicity.
D) Better matching of revenues and expenses.
Answer: C Difficulty: 1 Easy
Topic: Cash versus accrual accounting
Learning Objective: 01-02 Explain the difference between cash and accrual accounting.
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
38) In a recent annual report, Apple Computer reported the following in one of its disclosure
notes: "Warranty Expense: The Company provides currently for the estimated cost for product
warranties at the time the related revenue is recognized." This note exemplifies Apple's use of:
A) Conservatism.
B) Matching.
C) Realization principle.
D) Economic entity.
Answer: B Difficulty: 2 Medium
Topic: Concepts―Recognition - Measurement - Disclosure
Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice.
Bloom's: Evaluate
AACSB: Analytical Thinking
Accessible/AICPA: BB Critical thinking; Keyboard Navigation
39) GAAP is an abbreviation for:
A) Generally authorized accounting procedures.
B) Generally applied accounting procedures.
C) Generally accepted auditing practices.
D) Generally accepted accounting principles.
Answer: D Difficulty: 1 Easy
Topic: Development of accounting and reporting standards
Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of
accounting standards, including convergence between U.S. and international standards.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Legal; Keyboard Navigation
11
Copyright ©2018 McGraw-Hill
40) The FASB issues accounting standards in the form of:
A) Accounting Research Bulletins.
B) Accounting Standards Updates.
C) Financial Accounting Standards.
D) Financial Technical Bulletins.
Answer: B Difficulty: 1 Easy
Topic: Development of accounting and reporting standards
Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of
accounting standards, including convergence between U.S. and international standards.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Legal; Keyboard Navigation
41) Pronouncements issued by the Committee on Accounting Procedures:
A) Dealt with specific accounting and reporting problems.
B) Were based on exposure drafts and public comment letters.
C) Originated from congressional studies and SEC directives.
D) Were the outcome of research studies and a theoretical framework.
Answer: A Difficulty: 1 Easy
Topic: Development of accounting and reporting standards
Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of
accounting standards, including convergence between U.S. and international standards.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Legal; Keyboard Navigation
42) The FASB's standard-setting process includes, in the correct order:
A) Exposure draft, research, discussion paper, Accounting Standards Update.
B) Research, exposure draft, discussion paper, Accounting Standards Update.
C) Research, discussion paper, exposure draft, Accounting Standards Update.
D) Discussion paper, research, exposure draft, Accounting Standards Update.
Answer: C Difficulty: 1 Easy
Topic: GAAP―Standard-setting process
Learning Objective: 01-04 Explain why establishing accounting standards is characterized as a political process.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Legal; Keyboard Navigation
12
Copyright ©2018 McGraw-Hill
43) Which of the following is not a provision of the Public Company Accounting Reform and
Investor Protection Act of 2002 (Sarbanes-Oxley)? The Act:
A) Changed the entity responsible for setting auditing standards.
B) Increased corporate executive responsibility for financial statements.
C) Limited nonaudit services that can be performed by auditors for audit clients.
D) Changed the entity responsible for setting accounting standards.
Answer: D Difficulty: 1 Easy
Topic: Encouraging high-quality financial reporting
Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Legal; Keyboard Navigation
44) CPAs are licensed by:
A) The AICPA.
B) The SEC.
C) The federal government.
D) State governments.
Answer: D Difficulty: 1 Easy
Topic: Encouraging high-quality financial reporting
Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Legal; Keyboard Navigation
45) Which of the following has the statutory authority to set accounting standards in the United
States?
A) FASB.
B) IRS.
C) SEC.
D) AICPA.
Answer: C Difficulty: 1 Easy
Topic: Development of accounting and reporting standards
Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of
accounting standards, including convergence between U.S. and international standards.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Legal; Keyboard Navigation
13
Copyright ©2018 McGraw-Hill
46) When a registrant company submits its annual filing to the SEC, it uses:
A) Form 10-A.
B) Form 10-K.
C) Form 10-Q.
D) Form S-1.
Answer: B Difficulty: 1 Easy
Topic: Development of accounting and reporting standards
Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of
accounting standards, including convergence between U.S. and international standards.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Legal; Keyboard Navigation
47) The most likely important flaw leading to the demise of the APB was the perceived lack of:
A) Confidence.
B) Competence.
C) Independence.
D) Importance.
Answer: C Difficulty: 2 Medium
Topic: Development of accounting and reporting standards
Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of
accounting standards, including convergence between U.S. and international standards.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; Keyboard Navigation
48) Accounting standard-setting has been characterized as:
A) A political process.
B) Using the scientific method.
C) Pure deductive reasoning.
D) Pure inductive reasoning.
Answer: A Difficulty: 1 Easy
Topic: GAAP―Standard-setting process
Learning Objective: 01-04 Explain why establishing accounting standards is characterized as a political process.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; Keyboard Navigation
14
Copyright ©2018 McGraw-Hill
49) The International Accounting Standards Board:
A) Was the predecessor to the IASC.
B) Can overrule the FASB when their policies disagree.
C) Promotes the use of high-quality, understandable global accounting standards.
D) Has its headquarters in Geneva.
Answer: C Difficulty: 1 Easy
Topic: Development of accounting and reporting standards; International Financial Reporting Standards
Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of
accounting standards, including convergence between U.S. and international standards.; 01-11 Discuss the primary differences
between U.S. GAAP and IFRS with respect to the development of accounting standards and the conceptual framework
underlying accounting standards.
Bloom's: Remember
AACSB: Reflective Thinking; Diversity
Accessible/AICPA: BB Global; BB Legal; Keyboard Navigation
50) Which of the following is not a provision of the Public Company Accounting Reform and
Investor Protection Act of 2002?
A) Corporate executive accountability.
B) Auditor rotation.
C) Retention of work papers.
D) All of these answer choices are correct.
Answer: D Difficulty: 1 Easy
Topic: Encouraging high-quality financial reporting
Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Legal; Keyboard Navigation
51) The primary professional organization for those accountants working in industry is the:
A) AAA.
B) AICPA.
C) IIA.
D) IMA.
Answer: D Difficulty: 1 Easy
Topic: Encouraging high-quality financial reporting
Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; Keyboard Navigation
15
Copyright ©2018 McGraw-Hill
52) In the Norwalk Agreement, the FASB and IASB pledged to:
A) Combine their organizations to form the BUSYB.
B) Make progress on specific MOU projects.
C) Achieve convergence by the year 2015.
D) Remove existing differences between their standards.
Answer: D Difficulty: 1 Easy
Topic: Development of accounting and reporting standards; International Financial Reporting Standards
Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of
accounting standards, including convergence between U.S. and international standards.; 01-11 Discuss the primary differences
between U.S. GAAP and IFRS with respect to the development of accounting standards and the conceptual framework
underlying accounting standards.
Bloom's: Remember
AACSB: Diversity
Accessible/AICPA: BB Global; Keyboard Navigation
53) Which of the following is not a concern expressed by the SEC regarding IFRS adoption by
the U.S.?
A) Need for the U.S. to have strong influence on the standard-setting process and ensure that
standards meet U.S. needs.
B) The language barriers associated with cooperation among many countries in developing
IFRS.
C) The high costs to companies of converting to IFRS.
D) The fact that many laws, regulations and private contracts reference U.S. GAAP.
Answer: B Difficulty: 1 Easy
Topic: Development of accounting and reporting standards
Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of
accounting standards, including convergence between U.S. and international standards.
Bloom's: Remember
AACSB: Diversity
Accessible/AICPA: BB Global; Keyboard Navigation
54) The most political issue in the FASB's most recent deliberations and amendments to GAAP
on stock options was:
A) The negative effects on earnings of companies in the tech industry if they had to recognize
expenses associated with stock compensation.
B) The negative effects on assets of recognizing stock options in equity.
C) The disclosure of stock compensation expense in the notes.
D) Accounting for stock options that have not yet been granted to employees.
Answer: A Difficulty: 3 Hard
Topic: GAAP―Standard-setting process
Learning Objective: 01-04 Explain why establishing accounting standards is characterized as a political process.
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; Keyboard Navigation
16
Copyright ©2018 McGraw-Hill
55) An important historical reason for the FASB reversing its positions when political pressures
occur is:
A) The cost of gathering data was prohibitive.
B) The difficulties in measurement were too great.
C) Companies withdraw financial support for the FASB.
D) The SEC did not support the FASB position.
Answer: D Difficulty: 2 Medium
Topic: GAAP―Standard-setting process
Learning Objective: 01-04 Explain why establishing accounting standards is characterized as a political process.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; Keyboard Navigation
56) The most recent example of the political process at work in standard-setting is the heated
debate that occurred on the issue of:
A) Pension plan accounting.
B) Accounting for postretirement benefits other than pensions.
C) Accounting for business combinations.
D) Accounting for fair values.
Answer: D Difficulty: 2 Medium
Topic: GAAP―Standard-setting process
Learning Objective: 01-04 Explain why establishing accounting standards is characterized as a political process.
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; Keyboard Navigation
57) Independent auditors express an opinion on the:
A) Fairness of financial statements.
B) Accuracy of financial statements.
C) Soundness of a company's future.
D) Quality of a company's management.
Answer: A Difficulty: 2 Medium
Topic: Encouraging high-quality financial reporting
Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: FN Reporting; Keyboard Navigation
17
Copyright ©2018 McGraw-Hill
58) The possibility that the capital markets' focus on periodic profits may tempt a company's
management to bend or even break accounting rules to inflate reported net income is an example
of:
A) An ethical dilemma.
B) An accounting theory issue.
C) A technical accounting issue.
D) An auditor's responsibility to inform the SEC.
Answer: A Difficulty: 2 Medium
Topic: Encouraging high-quality financial reporting
Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting.
Bloom's: Evaluate
AACSB: Analytical Thinking; Ethics
Accessible/AICPA: BB Resource management; FN Risk analysis; Keyboard Navigation
59) One of the elements that many believe distinguishes a profession from other occupations is
the acceptance of responsibility by its members for the interests of those it serves, which is often
articulated in:
A) Its conceptual framework.
B) Its code of ethics.
C) Federal laws.
D) State laws.
Answer: B Difficulty: 2 Medium
Topic: Encouraging high-quality financial reporting
Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting.
Bloom's: Remember
AACSB: Ethics
Accessible/AICPA: BB Critical thinking; Keyboard Navigation
60) SFAC 8 of the conceptual framework focuses on:
A) Objective and qualitative characteristics.
B) Presentation and disclosure.
C) Recognition and measurement.
D) Elements of financial statements.
Answer: A Difficulty: 1 Easy
Topic: Conceptual framework―Purpose
Learning Objective: 01-06 Explain the purpose of the conceptual framework.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
18
Copyright ©2018 McGraw-Hill
61) The FASB's conceptual framework's qualitative characteristics of accounting information
include:
A) Historical cost.
B) Realization.
C) Faithful representation.
D) Full disclosure.
Answer: C Difficulty: 1 Easy
Topic: Concepts―Recognition - Measurement - Disclosure
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
62) The FASB's conceptual framework's qualitative characteristics of accounting information
include:
A) Full disclosure.
B) Relevance.
C) Going concern.
D) Historical cost.
Answer: B Difficulty: 1 Easy
Topic: Concepts―Recognition - Measurement - Disclosure
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
63) The conceptual framework's qualitative characteristic of relevance includes:
A) Predictive value.
B) Verifiability.
C) Completeness.
D) Neutrality.
Answer: A Difficulty: 1 Easy
Topic: Concepts―Recognition - Measurement - Disclosure
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
19
Copyright ©2018 McGraw-Hill
64) The conceptual framework's qualitative characteristic of faithful representation includes:
A) Predictive value.
B) Neutrality.
C) Confirmatory value.
D) Timeliness.
Answer: B Difficulty: 1 Easy
Topic: Concepts―Recognition - Measurement - Disclosure
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
65) SFAC No.5 focuses on:
A) Objectives of financial reporting.
B) Qualitative characteristics of accounting information.
C) Recognition and measurement concepts in accounting.
D) Elements of financial statements.
Answer: C Difficulty: 2 Medium
Topic: Conceptual framework―Purpose
Learning Objective: 01-06 Explain the purpose of the conceptual framework.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
66) The main issue in the debate over accounting for employee stock options was:
A) Which employees should receive options.
B) The amount of compensation expense that a company should recognize.
C) How many options should be granted to key executives.
D) The tax consequences of employee stock options.
Answer: B Difficulty: 2 Medium
Topic: GAAP―Standard-setting process
Learning Objective: 01-04 Explain why establishing accounting standards is characterized as a political process.
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
20
Copyright ©2018 McGraw-Hill
67) A firm's comprehensive income always:
A) Is the same as its net income.
B) Is greater than its net income.
C) Is less than its net income.
D) Could be greater than or less than net income.
Answer: D Difficulty: 1 Easy
Topic: Concepts―Elements of financial statements
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
68) Net income equals:
A) Assets minus liabilities.
B) Revenues minus cost of goods sold.
C) Revenues minus expenses.
D) Cash receipts minus cash payments.
Answer: C Difficulty: 1 Easy
Topic: Concepts―Elements of financial statements
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: FN Measurement; Keyboard Navigation
69) Enhancing qualitative characteristics of accounting information include each of the following
except:
A) Timeliness.
B) Materiality.
C) Comparability.
D) Verifiability.
Answer: B Difficulty: 1 Easy
Topic: Concepts―Qualitative characteristics
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
21
Copyright ©2018 McGraw-Hill
70) The enhancing qualitative characteristic of understandability means that information should
be understood by:
A) Those who are experts in the interpretation of financial information.
B) Those who have a reasonable understanding of business and economic activities.
C) Financial analysts.
D) CPAs.
Answer: B Difficulty: 1 Easy
Topic: Concepts―Qualitative characteristics
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
71) Fundamental qualitative characteristics of accounting information are:
A) Relevance and comparability.
B) Comparability and consistency.
C) Faithful representation and relevance.
D) Neutrality and consistency.
Answer: C Difficulty: 1 Easy
Topic: Concepts―Qualitative characteristics
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
72) Enhancing qualitative characteristics of accounting information include:
A) Relevance and comparability.
B) Comparability and timeliness.
C) Understandability and relevance.
D) Neutrality and consistency.
Answer: B Difficulty: 1 Easy
Topic: Concepts―Qualitative characteristics
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
22
Copyright ©2018 McGraw-Hill
73) Gains are:
A) Inflows from selling a product or service to a customer.
B) Increases in equity resulting from transfers of assets to the company from owners.
C) Increases in equity from peripheral transactions of an entity.
D) None of these answer choices are correct.
Answer: C Difficulty: 1 Easy
Topic: Concepts―Elements of financial statements
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
74) When there is agreement between a measure or description and the phenomenon it purports
to represent, information possesses which characteristic?
A) Verifiability.
B) Predictive value.
C) Faithful representation.
D) Timeliness.
Answer: C Difficulty: 1 Easy
Topic: Concepts―Qualitative characteristics
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
75) Surefeet Corporation changed its inventory valuation method. Which characteristic is
jeopardized by this change?
A) Comparability.
B) Representational faithfulness.
C) Consistency.
D) Feedback value.
Answer: C Difficulty: 1 Easy
Topic: Concepts―Qualitative characteristics
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
23
Copyright ©2018 McGraw-Hill
76) Elements of financial statements do not include:
A) Monetary unit.
B) Investments by owners.
C) Comprehensive income.
D) Losses.
Answer: A Difficulty: 1 Easy
Topic: Concepts―Elements of financial statements
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
77) The primary objective of financial accounting information is to provide useful information
to:
A) Management.
B) Capital providers.
C) Regulators.
D) Academicians.
Answer: B Difficulty: 2 Medium
Topic: Concepts―Qualitative characteristics
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; Keyboard Navigation
78) Of the following, the most important objective for financial reporting is to provide
information useful for:
A) Making decisions.
B) Determining taxable income.
C) Providing accountability.
D) Increasing future profits.
Answer: A Difficulty: 2 Medium
Topic: Concepts―Qualitative characteristics
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; Keyboard Navigation
24
Copyright ©2018 McGraw-Hill
79) A constraint on qualitative characteristics of accounting information is:
A) Timeliness.
B) Going concern.
C) Neutrality.
D) Cost-effectiveness.
Answer: D Difficulty: 2 Medium
Topic: Concepts―Qualitative characteristics
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
80) According to the conceptual framework, verifiability implies:
A) Legal evidence.
B) Logic.
C) Consensus.
D) Legal verdict.
Answer: C Difficulty: 2 Medium
Topic: Concepts―Qualitative characteristics
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
81) Maltec Corporation has started placing its quarterly financial statements on its web page,
thereby reducing by 10 days the time to get information to investors and creditors. The
qualitative concept improved is:
A) Comparability.
B) Consistency.
C) Timeliness.
D) Faithful representation.
Answer: C Difficulty: 2 Medium
Topic: Concepts―Qualitative characteristics
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; Keyboard Navigation
25
Copyright ©2018 McGraw-Hill
82) Recognizing expected losses immediately, but deferring expected gains, is an example of:
A) Materiality.
B) Conservatism.
C) Cost-effectiveness.
D) Timeliness.
Answer: B Difficulty: 2 Medium
Topic: Concepts―Qualitative characteristics
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
83) Change in equity from nonowner sources is:
A) Comprehensive income.
B) Revenues.
C) Expenses.
D) Gains and losses.
Answer: A Difficulty: 2 Medium
Topic: Concepts―Elements of financial statements
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
84) Which of the following Statements of Financial Accounting Concepts defines the 10
elements of financial statements?
A) SFAC 4.
B) SFAC 3.
C) SFAC 5.
D) SFAC 6.
Answer: D Difficulty: 2 Medium
Topic: Concepts―Elements of financial statements
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
26
Copyright ©2018 McGraw-Hill
85) Primecoat Corporation could disseminate its annual financial statements two days earlier if it
shifted substantial human resources from other operations to the annual report project.
Management decided the value of the earlier report was not worth the added commitment of
resources. The concept demonstrated is:
A) Timeliness.
B) Materiality.
C) Relevance.
D) Cost-effectiveness.
Answer: D Difficulty: 2 Medium
Topic: Concepts―Qualitative characteristics
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Resource management; Keyboard Navigation
86) Mega Loan Company has very stringent credit requirements and, accordingly, has negligible
losses from uncollectible accounts. The company's independent accountants did not protest
when, contrary to GAAP, the company recorded bad debt expense only when specific accounts
were determined to be uncollectible, rather than use an allowance for uncollectible accounts. The
concept demonstrated is:
A) Comparability.
B) Faithful representation.
C) Cost-effectiveness.
D) Materiality.
Answer: D Difficulty: 2 Medium
Topic: Concepts―Qualitative characteristics
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
87) Four different competent accountants independently agree on the amount and method of
reporting an economic event. The concept demonstrated is:
A) Reliability.
B) Comparability.
C) Completeness.
D) Verifiability.
Answer: D Difficulty: 2 Medium
Topic: Concepts―Qualitative characteristics
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
27
Copyright ©2018 McGraw-Hill
88) An important argument in support of historical cost information is:
A) Relevance.
B) Predictive quality for future cash flows.
C) Materiality.
D) Verifiability.
Answer: D Difficulty: 1 Easy
Topic: Concepts―Recognition - Measurement - Disclosure
Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice.
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
89) The conceptual framework's recognition and measurement concepts recognize which one of
the following as an assumption?
A) Going concern.
B) Historical cost.
C) Full disclosure.
D) Realization.
Answer: A Difficulty: 1 Easy
Topic: GAAP―Underlying assumptions
Learning Objective: 01-08 Describe the four basic assumptions underlying GAAP.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
90) The assumption that in the absence of contrary information a business entity will continue
indefinitely is the:
A) Periodicity assumption.
B) Entity assumption.
C) Going concern assumption.
D) Historical cost assumption.
Answer: C Difficulty: 2 Medium
Topic: GAAP―Underlying assumptions
Learning Objective: 01-08 Describe the four basic assumptions underlying GAAP.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
28
Copyright ©2018 McGraw-Hill
91) If a company has declared bankruptcy, its financial statements likely violate:
A) The fair value measurement approach.
B) The present value measurement approach.
C) The stable monetary unit assumption.
D) The going concern assumption.
Answer: D Difficulty: 2 Medium
Topic: GAAP―Underlying assumptions
Learning Objective: 01-08 Describe the four basic assumptions underlying GAAP.
Bloom's: Create
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
92) Which of the following is typically characterized as a principle, rather than an assumption?
A) Periodicity.
B) Monetary unit.
C) Conservatism.
D) Full disclosure.
Answer: D Difficulty: 1 Easy
Topic: GAAP―Underlying assumptions
Learning Objective: 01-08 Describe the four basic assumptions underlying GAAP.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
93) Which of the following is not an identified valuation technique in GAAP regarding fair
value measurement?
A) Cost approach.
B) Market approach.
C) Cost-benefit approach.
D) Income approach.
Answer: C Difficulty: 1 Easy
Topic: Concepts―Qualitative characteristics
Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
29
Copyright ©2018 McGraw-Hill
94) Disclosure notes to a company's financial statements:
A) Are relatively unimportant facts that don't belong in the basic financial statements.
B) Document the source of financial statement facts, like literary footnotes.
C) Are an integral part of a company's financial statements.
D) Are irrelevant facts that are immaterial in amount.
Answer: C Difficulty: 1 Easy
Topic: Concepts―Qualitative characteristics
Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
95) A cause-and-effect relationship is implicit in:
A) Realization.
B) Historical cost.
C) Matching.
D) The going concern assumption.
Answer: C Difficulty: 2 Medium
Topic: Concepts―Recognition - Measurement - Disclosure
Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
96) The full disclosure principle requires a balance between:
A) Comparability and consistency.
B) Relevance and cost-effectiveness.
C) Reliability and neutrality.
D) Timeliness and predictive value.
Answer: B Difficulty: 2 Medium
Topic: Concepts―Recognition - Measurement - Disclosure
Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice.
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
30
Copyright ©2018 McGraw-Hill
97) The recognition of which of the following expenses exemplifies the application of matching
expenses with the revenues they produced?
A) President's salary.
B) Research and development.
C) Cost of goods sold.
D) Advertising.
Answer: C Difficulty: 2 Medium
Topic: Concepts―Recognition - Measurement - Disclosure
Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice.
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
98) Land was acquired in 2018 for a future building site at a cost of $40,000. The assessed
valuation for tax purposes is $27,000, a qualified appraiser placed its value at $48,000, and a
recent firm offer for the land was for a cash payment of $46,000. The land should be reported in
the financial statements at:
A) $40,000.
B) $27,000.
C) $46,000.
D) $48,000.
Answer: A Difficulty: 2 Medium
Topic: Concepts―Recognition - Measurement - Disclosure
Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice.
Bloom's: Apply
AACSB: Knowledge Application
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
99) Revenue should not be recognized until:
A) The seller has transferred goods or services to a customer.
B) Contracts have been signed and payment has been received.
C) Work has been performed and customer has been billed.
D) Collection has been made and warrantees have expired.
Answer: A Difficulty: 2 Medium
Topic: Concepts―Recognition - Measurement - Disclosure
Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
31
Copyright ©2018 McGraw-Hill
100) Which of the following best demonstrates the full disclosure principle?
A) The multi-step income statement.
B) The auditors' report.
C) The company's tax return.
D) Disclosure notes to financial statements.
Answer: D Difficulty: 2 Medium
Topic: Concepts―Recognition - Measurement - Disclosure
Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice.
Bloom's: Create
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
101) The matching principle is:
A) A valuation method.
B) An expense recognition accounting principle.
C) A cash basis reporting principle.
D) An asset classification procedure.
Answer: B Difficulty: 2 Medium
Topic: Concepts―Recognition - Measurement - Disclosure
Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
102) Which of the following best describes the additional information that companies use to
meet the requirements of full disclosure in financial statements?
A) Parenthetical comments or modifying comments placed on the face of the financial
statements.
B) Disclosure notes conveying additional insights about company operations, accounting
principles, contractual agreements, and pending litigation.
C) Supplemental schedules and tables that report more detailed information than is shown in the
primary financial statements.
D) Comments on the face of the financial statements, and schedules, tables, and narrative
disclosures in notes to the financial statements.
Answer: D Difficulty: 2 Medium
Topic: Concepts―Recognition - Measurement - Disclosure
Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: FN Measurement; Keyboard Navigation
32
Copyright ©2018 McGraw-Hill
103) Ford Motor Company purchases services from suppliers on account and sells its products to
distributors on short-term credit. As a result, do each of these events affect net income faster than
they affect net operating cash flows?
Purchase Services Sell Products
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A) Option a.
B) Option b.
C) Option c.
D) Option d.
Answer: A Difficulty: 3 Hard
Topic: Cash versus accrual accounting; Concepts--Recognition-Measurement-Disclosure
Learning Objective: 01-02 Explain the difference between cash and accrual accounting.; 01-09 Describe the recognition,
measurement, and disclosure concepts that guide accounting practice.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
104) The revenue/expense approach emphasizes:
A) Recognition of revenues.
B) Recognition of expenses.
C) The income statement.
D) All of these answer choices are correct.
Answer: D Difficulty: 1 Easy
Topic: Evolving GAAP
Learning Objective: 01-10 Contrast a revenue/expense approach and an asset/liability approach to accounting standard setting.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
105) The asset/liability approach emphasizes:
A) Whether amounts on the balance sheet meet the definitions of assets and liabilities.
B) A close relation between the balance sheet and the statement of cash flows.
C) The distinction between net assets and gross assets.
D) All of these answer choices are correct.
Answer: A Difficulty: 1 Easy
Topic: Evolving GAAP
Learning Objective: 01-10 Contrast a revenue/expense approach and an asset/liability approach to accounting standard setting.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement; Keyboard Navigation
33
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106) Under IFRS, the role of the conceptual framework:
A) Primarily involves guiding standard setters to make sure that standards are consistent with
each other.
B) Includes serving as a guide for practitioners when a specific standard does not apply.
C) Is less important than in U.S. GAAP.
D) Has resulted primarily from a convergence with U.S. GAAP.
Answer: B Difficulty: 1 Easy
Topic: International Financial Reporting Standards
Learning Objective: 01-11 Discuss the primary differences between U.S. GAAP and IFRS with respect to the development of
accounting standards and the conceptual framework underlying accounting standards.
Bloom's: Remember
AACSB: Diversity
Accessible/AICPA: BB Global; Keyboard Navigation
107) Under IFRS, the conceptual framework:
A) Emphasizes the overarching concept of the financial statements providing a "true and fair
representation" of the company.
B) Is not designed to provide guidance to standard setters, but rather only to practitioners.
C) Is not designed to provide guidance to practitioners, but rather only to standard setters.
D) Specifies a set of rules that determine what constitutes a true IFRS standard.
Answer: A Difficulty: 2 Medium
Topic: International Financial Reporting Standards
Learning Objective: 01-11 Discuss the primary differences between U.S. GAAP and IFRS with respect to the development of
accounting standards and the conceptual framework underlying accounting standards.
Bloom's: Remember
AACSB: Diversity
Accessible/AICPA: BB Global; Keyboard Navigation
34
Copyright ©2018 McGraw-Hill
Listed below are five terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the correct term.
A) Pertinent to the decision at hand.
B) Information is available prior to the decision.
C) Information confirms expectations.
D) Decrease in equity due to transfers to owners.
E) Information is useful in projecting cash flows.
108) Predictive value Difficulty: 2 Medium
Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Elements of financial statements;
GAAP―Underlying assumptions
Learning Objective: 01-06, 01-07, 01-08
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
109) Relevance Difficulty: 2 Medium
Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Elements of financial statements;
GAAP―Underlying assumptions
Learning Objective: 01-06, 01-07, 01-08
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
110) Timeliness Difficulty: 2 Medium
Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Elements of financial statements;
GAAP―Underlying assumptions
Learning Objective: 01-06, 01-07, 01-08
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
111) Distribution to owners Difficulty: 2 Medium
Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Elements of financial statements;
GAAP―Underlying assumptions
Learning Objective: 01-06, 01-07, 01-08
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
112) Confirmatory value Difficulty: 2 Medium
Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Elements of financial statements;
GAAP―Underlying assumptions
Learning Objective: 01-06, 01-07, 01-08
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
Answers: 108) E 109) A 110) B 111) D 112) C
35
Copyright ©2018 McGraw-Hill
Listed below are five terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the correct term.
A) The change in equity from nonowner transactions.
B) Contains all information necessary for faithful representation.
C) Along with relevance, a fundamental decision-specific quality.
D) Results if an asset is sold for more than book value.
E) Concerns the decision-making impact of both the amount and nature of an item.
113) Gain Difficulty: 2 Medium
Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Elements of financial statements;
Learning Objective: 01-06, 01-07
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
114) Materiality Difficulty: 2 Medium
Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Elements of financial statements;
Learning Objective: 01-06, 01-07
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
115) Completeness Difficulty: 2 Medium
Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Elements of financial statements;
Learning Objective: 01-06, 01-07
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
116) Comprehensive income Difficulty: 2 Medium
Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Elements of financial statements;
Learning Objective: 01-06, 01-07
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
117) Faithful representation Difficulty: 2 Medium
Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Elements of financial statements;
Learning Objective: 01-06, 01-07
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
Answers: 113) D 114) E 115) B 116) A 117) C
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Copyright ©2018 McGraw-Hill
Listed below are five terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the correct term.
A) The decision to include an amount in the financial statements.
B) Accounting information should be unbiased.
C) Considers the value of using information relative to cost of providing it.
D) Important in analysis between firms.
E) Applying the same accounting practices over time.
118) Neutrality Difficulty: 2 Medium
Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Recognition - Measurement -
Disclosure
Learning Objective: 01-06, 01-07, 01-09
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
119) Comparability Difficulty: 2 Medium
Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Recognition - Measurement -
Disclosure
Learning Objective: 01-06, 01-07, 01-09
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
120) Consistency Difficulty: 2 Medium
Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Recognition - Measurement -
Disclosure
Learning Objective: 01-06, 01-07, 01-09
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
121) Cost-effectiveness Difficulty: 2 Medium
Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Recognition - Measurement -
Disclosure
Learning Objective: 01-06, 01-07, 01-09
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
122) Recognition Difficulty: 2 Medium
Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Recognition - Measurement -
Disclosure
Learning Objective: 01-06, 01-07, 01-09
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
Answers: 118) B 119) D 120) E 121) C 122) A
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Copyright ©2018 McGraw-Hill
Listed below are five terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the correct term.
A) Implies consensus among different observers.
B) Assumes an entity will continue to operate indefinitely.
C) Ignores the possibility of inflation.
D) Assumes all transactions can be identified with a particular entity.
E) Requires reporting the financial life of an entity in discrete time frames.
123) Monetary unit assumption Difficulty: 2 Medium
Topic: Concepts―Qualitative characteristics; GAAP―Underlying assumptions
Learning Objective: 01-07, 01-08
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
124) Verifiability Difficulty: 2 Medium
Topic: Concepts―Qualitative characteristics; GAAP―Underlying assumptions
Learning Objective: 01-07, 01-08
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
125) Economic entity assumption Difficulty: 2 Medium
Topic: Concepts―Qualitative characteristics; GAAP―Underlying assumptions
Learning Objective: 01-07, 01-08
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
126) Going concern assumption Difficulty: 2 Medium
Topic: Concepts―Qualitative characteristics; GAAP―Underlying assumptions
Learning Objective: 01-07, 01-08
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
127) Periodicity assumption Difficulty: 2 Medium
Topic: Concepts―Qualitative characteristics; GAAP―Underlying assumptions
Learning Objective: 01-07, 01-08
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
Answers: 123) C 124) A 125) D 126) B 127) E
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Copyright ©2018 McGraw-Hill
Listed below are five terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the correct term.
A) Basis of measurement for fixed assets.
B) Reporting of all information that could affect decisions.
C) Occurs when goods or services are transferred to the customer.
D) Discounts future cash flows.
E) Application of GAAP sometimes avoided under this constraint.
128) Historical cost Difficulty: 2 Medium
Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Recognition - Measurement -
Disclosure
Learning Objective: 01-06, 01-07, 01-09
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
129) Materiality Difficulty: 2 Medium
Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Recognition - Measurement -
Disclosure
Learning Objective: 01-06, 01-07, 01-09
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
130) Revenue recognition Difficulty: 2 Medium
Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Recognition - Measurement -
Disclosure
Learning Objective: 01-06, 01-07, 01-09
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
131) Full disclosure Difficulty: 2 Medium
Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Recognition - Measurement -
Disclosure
Learning Objective: 01-06, 01-07, 01-09
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
132) Present value Difficulty: 2 Medium
Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Recognition - Measurement -
Disclosure
Learning Objective: 01-06, 01-07, 01-09
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
Answers: 128) A 129) E 130) C 131) B 132) D
39
Copyright ©2018 McGraw-Hill
Listed below are five terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the correct term.
A) Its EITF Issues are GAAP when entered in the Accounting Standards Codification.
B) It is the national organization for CPAs in the United States.
C) It has the authority to set U.S. accounting standards.
D) It established GAAP before the FASB.
E) Undermines representational faithfulness by being inconsistent with neutrality.
133) Financial Accounting Standards Board Difficulty: 2 Medium
Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Recognition - Measurement -
Disclosure
Learning Objective: 01-06, 01-07, 01-09
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
134) Accounting Principles Board Difficulty: 2 Medium
Topic: Conceptual framework―Purpose; Concepts―Qualitative characteristics; Concepts―Recognition - Measurement -
Disclosure
Learning Objective: 01-06, 01-07, 01-09
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
135) Conservatism Difficulty: 2 Medium
Topic: Development of accounting and reporting standards; Encouraging high-quality financial reporting; Concepts―Qualitative
characteristics
Learning Objective: 01-03, 01-05, 01-07
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; BB Legal
136) American Institute of CPAs (AICPA) Difficulty: 2 Medium
Topic: Development of accounting and reporting standards; Encouraging high-quality financial reporting; Concepts―Qualitative
characteristics
Learning Objective: 01-03, 01-05, 01-07
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; BB Legal
137) Securities and Exchange Commission Difficulty: 2 Medium
Topic: Development of accounting and reporting standards; Encouraging high-quality financial reporting; Concepts―Qualitative
characteristics
Learning Objective: 01-03, 01-05, 01-07
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; BB Legal
Answers: 133) A 134) D 135) E 136) B 137) C
40
Copyright ©2018 McGraw-Hill
Listed below are five terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the correct term.
A) Net assets.
B) Transfers of resources in exchange for common and preferred stock.
C) Claims of creditors against the assets of a business.
D) Outflows of resources to generate revenues.
E) Cash dividends.
138) Expenses Difficulty: 1 Easy
Topic: Concepts―Elements of financial statements
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
139) Equity Difficulty: 1 Easy
Topic: Concepts―Elements of financial statements
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
140) Distributions to owners Difficulty: 1 Easy
Topic: Concepts―Elements of financial statements
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
141) Investments by owners Difficulty: 1 Easy
Topic: Concepts―Elements of financial statements
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
142) Liabilities Difficulty: 1 Easy
Topic: Concepts―Elements of financial statements
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
Answers: 138) D 139) A 140) E 141) B 142) C
41
Copyright ©2018 McGraw-Hill
Listed below are five terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the correct term.
A) Net outflows from peripheral transactions.
B) Probable future economic benefits controlled by an entity.
C) Results if an asset is sold for more than book value.
D) Increases in equity from the sale of goods and/or services.
E) All changes in equity except owner transactions.
143) Losses Difficulty: 1 Easy
Topic: Concepts―Elements of financial statements
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
144) Assets Difficulty: 1 Easy
Topic: Concepts―Elements of financial statements
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
145) Revenues Difficulty: 1 Easy
Topic: Concepts―Elements of financial statements
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
146) Comprehensive income Difficulty: 1 Easy
Topic: Concepts―Elements of financial statements
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
147) Gains Difficulty: 1 Easy
Topic: Concepts―Elements of financial statements
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
Answers: 143) A 144) B 145) D 146) E 147) C
42
Copyright ©2018 McGraw-Hill
Listed below are ten organizations followed by a list of phrases that describe or characterize the
organizations. Match each phrase with the correct organization.
A) FASB's predecessor.
B) Primary national organization of accountants working in industry.
C) Regulates the financial reporting for public companies.
D) The FASB's parent organization.
E) National organization of certified public accountants.
F) Sets accounting standards in the United States.
G) Provides timely responses to financial reporting issues.
H) Advises the FASB
I) Sets global accounting standards.
J) Establishes auditing standards in the US for public companies.
148) SEC Difficulty: 2 Medium
Topic: Development of accounting and reporting standards; Encouraging high-quality financial reporting
Learning Objective: 01-03, 01-05
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; BB Legal
149) FASB Difficulty: 2 Medium
Topic: Development of accounting and reporting standards; Encouraging high-quality financial reporting
Learning Objective: 01-03, 01-05
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; BB Legal
150) IASB Difficulty: 2 Medium
Topic: Development of accounting and reporting standards; Encouraging high-quality financial reporting
Learning Objective: 01-03, 01-05
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; BB Legal
151) AICPA Difficulty: 2 Medium
Topic: Development of accounting and reporting standards; Encouraging high-quality financial reporting
Learning Objective: 01-03, 01-05
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; BB Legal
152) EITF Difficulty: 2 Medium
Topic: Development of accounting and reporting standards; Encouraging high-quality financial reporting
Learning Objective: 01-03, 01-05
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; BB Legal
43
Copyright ©2018 McGraw-Hill
153) PCAOB Difficulty: 2 Medium
Topic: Development of accounting and reporting standards; Encouraging high-quality financial reporting
Learning Objective: 01-03, 01-05
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; BB Legal
154) IMA Difficulty: 2 Medium
Topic: Development of accounting and reporting standards; Encouraging high-quality financial reporting
Learning Objective: 01-03, 01-05
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; BB Legal
155) FASAC Difficulty: 2 Medium
Topic: Development of accounting and reporting standards; Encouraging high-quality financial reporting
Learning Objective: 01-03, 01-05
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; BB Legal
156) APB Difficulty: 2 Medium
Topic: Development of accounting and reporting standards; Encouraging high-quality financial reporting
Learning Objective: 01-03, 01-05
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; BB Legal
157) FAF Difficulty: 2 Medium
Topic: Development of accounting and reporting standards; Encouraging high-quality financial reporting
Learning Objective: 01-03, 01-05
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; BB Legal
Answers: 148) C 149) F 150) I 151) E 152) G 153) J 154) B 155) H 156) A 157) D
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Copyright ©2018 McGraw-Hill
Use this information to answer the following questions:
Alpaca Corporation had revenues of $200,000 in its first year of operations. The company has
not collected on $20,000 of its sales and still owes $25,000 on $70,000 of merchandise it
purchased. The company had no inventory on hand at the end of the year. The company paid
$15,000 in salaries. Owners invested $20,000 in the business and $20,000 was borrowed on a
five-year note. The company paid $2,000 in interest that was the amount owed for the year, and
paid $6,000 for a two-year insurance policy on the first day of business. Alpaca has an effective
income tax rate of 40%.
158) Compute net income for the first year for Alpaca Corporation.
Answer:
Revenues $200,000
Expenses:
Cost of goods sold 70,000
Salaries 15,000
Interest 2,000
Insurance 3,000 90,000
Income before tax 110,000
Income tax at 40% 44,000
Net income $ 66,000 Difficulty: 3 Hard
Topic: Cash versus accrual accounting
Learning Objective: 01-02 Explain the difference between cash and accrual accounting.
Bloom's: Apply
AACSB: Knowledge Application
Accessible/AICPA: BB Critical thinking; FN Measurement
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Copyright ©2018 McGraw-Hill
159) Compute the cash balance at the end of the first year for Alpaca Corporation.
Answer:
Cash receipts:
Sales revenue $200,000
Less: Accounts receivable 20,000 $180,000
Owners' investments 20,000
Note payable 20,000
Total receipts 220,000
Cash disbursements:
Purchases 70,000
Less: Accounts payable 25,000 $ 45,000
Salaries paid 15,000
Interest paid 2,000
Insurance paid 6,000
Estimated taxes paid 44,000
Total cash disbursements 112,000
Ending cash balance $108,000 Difficulty: 2 Medium
Topic: Cash versus accrual accounting
Learning Objective: 01-02 Explain the difference between cash and accrual accounting.
Bloom's: Apply
AACSB: Knowledge Application
Accessible/AICPA: BB Critical thinking; FN Measurement
46
Copyright ©2018 McGraw-Hill
Use this information to answer the following questions:
Tri Fecta, a partnership, had revenues of $360,000 in its first year of operations. The partnership
has not collected on $35,000 of its sales and still owes $40,000 on $150,000 of merchandise it
purchased. There was no inventory on hand at the end of the year. The partnership paid $25,000
in salaries. The partners invested $40,000 in the business and $25,000 was borrowed on a five-
year note. The partnership paid $3,000 in interest that was the amount owed for the year and paid
$8,000 for a two-year insurance policy on the first day of business.
160) Compute net income for the first year for Tri Fecta.
Answer:
Revenues $360,000
Expenses:
Cost of Goods Sold $150,000
Salaries 25,000
Interest 3,000
Insurance 4,000 182,000
Net income $178,000 Difficulty: 3 Hard
Topic: Cash versus accrual accounting
Learning Objective: 01-02 Explain the difference between cash and accrual accounting.
Bloom's: Apply
AACSB: Knowledge Application
Accessible/AICPA: BB Critical thinking; FN Measurement
161) Compute the cash balance at the end of the first year for Tri Fecta.
Answer:
Cash receipts:
Sales revenue $360,000
Less: Accounts receivable 35,000 $325,000
Owners' investments 40,000
Note payable 25,000
Total receipts 390,000
Cash disbursements:
Purchases 150,000
Less: Accounts payable 40,000 110,000
Salaries paid 25,000
Interest paid 3,000
Insurance paid 8,000
Total cash disbursements 146,000
Ending cash balance $244,000 Difficulty: 2 Medium
Topic: Cash versus accrual accounting
Learning Objective: 01-02 Explain the difference between cash and accrual accounting.
Bloom's: Apply
AACSB: Knowledge Application
Accessible/AICPA: BB Critical thinking; FN Measurement
47
Copyright ©2018 McGraw-Hill
Use this information to answer the following questions:
The following information ($ in millions) comes from a recent annual report of Amazon.com,
Inc.:
Net sales $10,711
Total assets 4,363
End of year balance in cash 1,022
Total stockholders' equity 431
Gross profit (Sales – Cost of Sales) 2,456
Net increase in cash for the year 9
Operating expenses 2,067
Net operating cash flow 702
Other income (expense), net (12)
162) Compute Amazon's balance in cash at the beginning of the year.
Answer: Beginning balance in Cash + Net increase in Cash = Ending balance in Cash
Therefore, Beginning balance in Cash = Ending balance in Cash – Net increase in Cash
= $1,022 – 9 = $1,013 Difficulty: 2 Medium
Topic: Cash versus accrual accounting
Learning Objective: 01-02 Explain the difference between cash and accrual accounting.
Bloom's: Apply
AACSB: Knowledge Application
Accessible/AICPA: BB Critical thinking; FN Measurement
163) Compute Amazon's total liabilities at the end of the year.
Answer: Total assets = Total liabilities + Total stockholders' equity
Therefore, Total liabilities = Total assets – Total stockholders' equity =
$4,363 – 431 = $3,932 Difficulty: 1 Easy
Topic: Cash versus accrual accounting
Learning Objective: 01-02 Explain the difference between cash and accrual accounting.
Bloom's: Apply
AACSB: Knowledge Application
Accessible/AICPA: BB Critical thinking; FN Measurement
164) Compute Amazon's cost of goods sold for the year.
Answer: Gross profit = Net sales – Cost of goods sold
Therefore, Cost of goods sold = Net sales – Gross profit
= $10,711 – 2,456 = $8,255 Difficulty: 1 Easy
Topic: Cash versus accrual accounting
Learning Objective: 01-02 Explain the difference between cash and accrual accounting.
Bloom's: Apply
AACSB: Knowledge Application
Accessible/AICPA: BB Critical thinking; FN Measurement
48
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165) Compute the income before income tax for Amazon.
Answer: Net income = Gross profit – Operating expenses + Other income (expense), net
= $2,456 – 2,067 + (12) = $377 Difficulty: 1 Easy
Topic: Cash versus accrual accounting
Learning Objective: 01-02 Explain the difference between cash and accrual accounting.
Bloom's: Apply
Accessible/AICPA: BB Critical thinking; FN Measurement
166) Compare net income (loss) for the year to net cash flow from operating activities. Why are
these amounts different? Briefly explain.
Answer: These amounts are different because of the differences between cash and accrual
accounting. As opposed to cash flows from operations, net income includes both revenues and
expenses the timing of which differs from the timing of certain cash receipts and payments.
Examples would be credit sales in which the revenues are recorded before the collection of cash
and cost of goods sold in which the expense often is recorded later than the cash payment to the
supplier for the merchandise. Difficulty: 2 Medium
Topic: Cash versus accrual accounting
Learning Objective: 01-02 Explain the difference between cash and accrual accounting.
Bloom's: Understand
AACSB: Reflective Thinking; Communication
Accessible/AICPA: FN Measurement
49
Copyright ©2018 McGraw-Hill
167) For each of the following situations, state whether you agree or disagree with the financial
reporting practice employed, and briefly explain the reason for your answer.
1. Cantor Corporation's accountant increased the book value of a patent from its original cost of
$1 million to its recently appraised value of $6 million.
2. Stanton Corporation paid for the personal travel of its chief financial officer and charged travel
expense.
3. At the end of its 2018 fiscal year, Dower, Inc., received an order from a customer for $60,000.
The merchandise will ship early in 2019. Because the sale was made to a long-time customer and
the invoice was paid in 2018, the controller recorded the sale in 2018.
4. In the middle of its 2018 fiscal year, Sanguinetti, Inc. paid $12,000 to its insurance company
for one-year comprehensive insurance coverage. Sanguinetti recorded the entire expenditure as
an expense in 2018.
5. The Churchill Pharmaceutical Company included a note in its financial statements that
described a pending lawsuit against the company.
6. The Daily Corporation, a company whose securities are publicly traded, prepares monthly,
quarterly, and annual financial statements for internal use but disseminates to external users only
the annual financial statements.
Answer:
1. Disagree. This is a violation of the historical cost (original transaction value) principle.
2. Disagree. This is a violation of the economic entity assumption.
3. Disagree. The seller has not satisfied its obligation to deliver goods.
4. Disagree. This is a violation of matching.
5. Agree. The company is conforming to the full disclosure principle.
6. Disagree. This is a violation of the periodicity assumption. Difficulty: 2 Medium
Topic: Concepts―Recognition - Measurement - Disclosure
Learning Objective: 01-08 Describe the four basic assumptions underlying GAAP.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
168) Identify or define the following terms: economic entity, going concern.
Answer: Economic entity: All economic events can be identified with a particular economic
entity.
Going concern: In the absence of information to the contrary, it is anticipated that a business
entity will continue to operate indefinitely. Difficulty: 2 Medium
Topic: GAAP―Underlying assumptions
Learning Objective: 01-08 Describe the four basic assumptions underlying GAAP.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
50
Copyright ©2018 McGraw-Hill
169) List the four financial statements most frequently provided to external users.
Answer: Balance sheet, Income statement, Statement of cash flows, Statement of shareholders'
equity. Difficulty: 1 Easy
Topic: Cash versus accrual accounting
Learning Objective: 01-01 Describe the function and primary focus of financial accounting.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
170) Explain and show an example of how the FASB's conceptual framework is needed in
formulating standards on controversial topics.
Answer: In order to provide consistency, a conceptual framework (a map clearly defining beliefs
or structure) must be provided. This is the foundation for a strong, logical, and fair system. For
example, in debating accounting for stock-based compensation, the FASB's conceptual
framework explains the rationale for treating stock options as an expense. By relating the
accounting for such compensation to the purpose of financial statements and their qualitative
characteristics, the FASB can defend its positions without the bias inherent in such controversial
issues. Difficulty: 3 Hard
Topic: Conceptual framework―Purpose
Learning Objective: 01-06 Explain the purpose of the conceptual framework.
Bloom's: Understand
AACSB: Communication
Accessible/AICPA: BB Critical thinking
171) What is the SEC and how is it involved with accounting standard-setting?
Answer: The Securities and Exchange Commission is a federal agency that has the authority to
set accounting standards. However, the SEC has always relied on a private-sector body, such as
the current FASB, to accomplish that task. Difficulty: 1 Easy
Topic: Development of accounting and reporting standards
Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of
accounting standards, including convergence between U.S. and international standards.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Legal
172) What is the EITF and what is its purpose?
Answer: The Emerging Issues Task Force (EITF) acts as a filter for the FASB. It includes 15
individuals from public accounting and private industry along with a representative from the
FASB and an SEC observer. The task force focuses on emerging issues and attempts to reach a
consensus, speeding up the standard-setting process. Difficulty: 2 Medium
Topic: Development of accounting and reporting standards
Learning Objective: 01-03 Define generally accepted accounting principles (GAAP) and discuss the historical development of
accounting standards, including convergence between U.S. and international standards.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking
51
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173) Accounting standard-setting has been characterized as a political process. Discuss this
proposition giving an example.
Answer: Changes in GAAP can have significant differential effects on companies, investors,
creditors, and other interest groups. The FASB must gauge the economic consequences of a
change in accounting standards. The process by which financial accounting standards are created
includes public comment and sometimes hearings. Ultimately, a vote must be taken to pass a
proposed change in GAAP. Accounting for stock-based compensations (options) and
postretirement health care benefits are examples where accounting practices have been affected
by political influences on GAAP. Difficulty: 2 Medium
Topic: GAAP―Standard-setting process
Learning Objective: 01-04 Explain why establishing accounting standards is characterized as a political process.
Bloom's: Understand
AACSB: Communication
Accessible/AICPA: BB Critical thinking
174) What are the key provisions of the Public Company Accounting Reform and Investor
Protection (Sarbanes-Oxley) Act of 2002?
Answer: The Act requires the regulation of auditors and the types of services they furnish to
clients, increases accountability of corporate executives, addresses conflicts of interest for
auditors and securities analysts, and requires that companies document and assess their internal
controls. It also requires auditors to express an opinion on management's assessment of internal
controls, and the auditors must also express their own opinion on company internal controls. Difficulty: 2 Medium
Topic: Encouraging high-quality financial reporting
Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting.
Bloom's: Remember
AACSB: Communication
Accessible/AICPA: BB Legal
175) What is the value of a company having financial statements audited by an independent
auditor?
Answer: Outside auditors add credibility to financial statements, increasing the confidence of
capital market participants who rely on financial statements in making investment and credit
decisions and recommendations. Difficulty: 2 Medium
Topic: Encouraging high-quality financial reporting
Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting.
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking
52
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176) What provisions did the Public Company Accounting Reform and Investor Protection
(Sarbanes-Oxley) Act of 2002 make for performance of nonaudit services by an audit firm?
Answer: The law makes it unlawful for the auditors of public companies to perform a variety of
nonaudit services for audit clients. Prohibited services include bookkeeping, internal audit
outsourcing, appraisal or valuation services, and various other consulting services. Other
nonaudit services, including tax services, require preapproval by the audit committee of the
company being audited. Difficulty: 2 Medium
Topic: Encouraging high-quality financial reporting
Learning Objective: 01-05 Explain factors that encourage high-quality financial reporting.
Bloom's: Remember
AACSB: Ethics
Accessible/AICPA: BB Legal
177) Briefly describe how materiality is featured in the conceptual framework.
Answer: Materiality—Information is material if it can have an effect on a decision made by a
user. Thus, materiality is an aspect of relevance. If an item is not material, GAAP need not be
followed. For example, if a large corporation purchased a water cooler for one of its common
areas for $120, the amount could be expensed rather than recorded as an asset even though the
cooler will be useful for several years. Materiality is a judgment call. Materiality is concerned
with both the dollar amount of an item and/or the nature of an item. It would probably be
material if Microsoft received $1,000,000 in bribes from a Chinese company for its technology.
A $1,000,000 write-off of old equipment would probably be immaterial for Microsoft. Difficulty: 3 Hard
Topic: Concepts―Qualitative characteristics
Learning Objective: 01-07 Identify the objective and qualitative characteristics of financial reporting information, and the
elements of financial statements.
Bloom's: Understand
AACSB: Communication
Accessible/AICPA: BB Critical thinking; FN Measurement
178) Give an example of a violation of the stable monetary unit assumption. How would it affect
the quality of financial statement information?
Answer: If a country experiences severe inflation, this would violate the assumption that dollar
amounts are constantly valued. This would limit the usefulness of adding numbers in financial
statements, because (for instance) costs at different times are not comparable without adjusting
for changes in purchasing power. Difficulty: 2 Medium
Topic: GAAP―Underlying assumptions
Learning Objective: 01-08 Describe the four basic assumptions underlying GAAP.
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
53
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179) Identify or define the following terms: periodicity, monetary unit.
Answer: Periodicity—The life of a company can be divided into artificial periods to provide
timely information to external users.
Monetary unit—In the United States, financial statement elements should be measured in terms
of the U.S. dollar. It assumes that the value of a dollar is stable over time. Difficulty: 1 Easy
Topic: GAAP―Underlying assumptions
Learning Objective: 01-08 Describe the four basic assumptions underlying GAAP.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
180) Identify or define the following term: historical cost.
Answer: Historical cost—A measurement attribute under which asset and liability
measurements are based on the amount given or received in an exchange transaction. Difficulty: 1 Easy
Topic: Concepts―Recognition - Measurement - Disclosure
Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
181) How does GAAP define fair value?
Answer: Fair value is defined as the price that would be received to sell assets or paid to transfer
a liability in an orderly transaction between market participants at the measurement date. Difficulty: 2 Medium
Topic: Concepts―Recognition - Measurement - Disclosure
Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
182) Over time, accounting standards have developed to reflect changes in the business world as
well as changes in our ability to account for such changes. Using the example of marking assets
and liabilities to their fair value, explain why you would expect accounting standards to change.
Answer: Historically, financial accounting relied on transaction amounts (historical cost) as the
fundamental measurement approach for reporting assets and liabilities. As markets have
matured, it is more relevant and feasible to report some assets and liabilities at their fair values,
particularly if such items have a ready market that is active. Difficulty: 2 Medium
Topic: Concepts―Recognition - Measurement - Disclosure
Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice.
Bloom's: Understand
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
54
Copyright ©2018 McGraw-Hill
183) List and briefly describe the five measurement attributes used commonly in current GAAP.
Answer:
a. Historical cost: the amount given or received in an exchange transaction.
b. Net realizable value: the amount of cash into which an asset is expected to be converted in
the ordinary course of business.
c. Current cost: the cost that would be incurred to purchase or reproduce an asset.
d. Present value: the sum of future cash flows discounted for the time value of money.
e. Fair value: the price that would be received to sell assets or transfer liabilities in an orderly
market transaction. Difficulty: 3 Hard
Topic: Concepts―Recognition - Measurement - Disclosure
Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
184) List and briefly describe the three levels of inputs described in the fair-value measurement
hierarchy.
Answer:
a. Quoted market prices in active markets for identical assets or liabilities.
b. Inputs other than quoted prices that can be observed for the asset or liability. These inputs
include quoted prices for similar assets or liabilities in active or inactive markets and inputs that
are derived principally from or corroborated by market data that can be observed.
c. Inputs that cannot be observed that reflect the entity's own assumptions about the
assumptions market participants would use in pricing the asset or liability developed based on
the best information available in the circumstances. Difficulty: 3 Hard
Topic: Concepts―Qualitative characteristics
Learning Objective: 01-09 Describe the recognition, measurement, and disclosure concepts that guide accounting practice.
Bloom's: Remember
AACSB: Reflective Thinking
Accessible/AICPA: BB Critical thinking; FN Measurement
55
Copyright ©2018 McGraw-Hill
185) Contrast the asset/liability and revenue/expense approaches to accounting standard setting.
Answer: Under the revenue/expense approach, we emphasize principles for recognizing
revenues and expenses, with some assets and liabilities recognized as necessary to make the
balance sheet reconcile with the income statement. Much of our accounting for revenues and
expenses follows this revenue/expense approach.
Under the asset/liability approach, on the other hand, we first recognize and measure the assets
and liabilities that exist at a balance sheet date and, secondly, recognize and measure the
revenues, expenses, gains and losses needed to account for the changes in these assets and
liabilities from the previous measurement date. Therefore, we should try to recognize and
measure assets and liabilities appropriately, and as a result will also capture their inflows and
outflows in a manner that provides relevant and representationally faithful information about
revenues and expenses. Difficulty: 3 Hard
Topic: Evolving GAAP
Learning Objective: 01-10 Contrast a revenue/expense approach and an asset/liability approach to accounting standard setting.
Bloom's: Remember
AACSB: Communication
Accessible/AICPA: BB Critical thinking; FN Measurement
186) Contrast the role of the conceptual framework in U.S. GAAP and IFRS.
Answer: The conceptual frameworks in U.S. GAAP and IFRS are very similar and are
converging even more with ongoing efforts by the FASB and IASB. However, in U.S. GAAP,
the conceptual framework primarily provides guidance to standard setters to help them develop
high-quality standards. In IFRS the conceptual framework guides standard setting, but in
addition it is supposed to provide a basis for practitioners to make accounting judgments when
another IFRS standard does not apply. Also, IFRS emphasizes the overarching concept of the
financial statements providing a "true and fair representation" of the company. U.S. GAAP does
not include a similar requirement, but U.S. auditing standards require this consideration. Difficulty: 3 Hard
Topic: International Financial Reporting Standards―IFRS
Learning Objective: 01-11 Discuss the primary differences between U.S. GAAP and IFRS with respect to the development of
accounting standards and the conceptual framework underlying accounting standards.
Bloom's: Remember
AACSB: Communication
Accessible/AICPA: BB Critical thinking
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